What’s Next – Private Equity Swoops In
Like so many of you, I’m reading, watching, and discussing every new development in the “credit crisis.” I put that term in quotes, since anyone who has been reading this blog knows I believe that using the word “crisis” is an excuse for so many to abdicate responsibility for anticipating it, regulating it, and preventing it.
Merriam-Webster says a crisis is:
1 a: the turning point for better or worse in an acute disease or fever b: a paroxysmal attack of pain, distress, or disordered function c: an emotionally significant event or radical change of status in a person’s life
2 the decisive moment (as in a literary plot)
3 a: an unstable or crucial time or state of affairs in which a decisive change is impending ; especially : one with the distinct possibility of a highly undesirable outcome b: a situation that has reached a critical phase
2 the decisive moment (as in a literary plot)
3 a: an unstable or crucial time or state of affairs in which a decisive change is impending ; especially : one with the distinct possibility of a highly undesirable outcome b: a situation that has reached a critical phase
I can’t tell you how many times in the last few weeks I have heard news commentators, business reporters, and legislators say, “It’s a crisis, a financial crisis. No one could have prevented it.”
Baloney. Here’s for a good list, one that I wish had included the auditors. But Peter Santilli does a good job spelling out in plain language all the other issues, most of them longstanding, that pointed to the problems with the economy, an accident waiting to happen.
So what’s next?
Well, with all of this doom and gloom analysis, and the “hindsight is 20-20” excuses making me mad as hell, it was refreshing to get an email with some productive, interesting ideas. That these ideas coincided with my own was no coincidence. McKenna Long & Aldridge LLP is an international law firm of attorneys and public policy advisors. In addition to typical transactional and litigation services, McKenna Long has an active Regulatory Services practice and actively advocates for its clients, corporates, with local, state and federal governments worldwide.
I became acquainted with this firm at the Compliance Week Conference. Having the same name is a hook and helps them remember me more easily when I call. I signed up for their newsletters and get nice publications in the mail on occasion. On October 1, I received a great email update entitled, “Identifying Opportunities and Risks Amid The Financial Crisis.” Now that’s chutzpah! The bailout package wasn’t even finalized and this firm was already communicating with their clients (and me) about how to capitalize on the crisis. They are fortunate if most of their clients are in a financial position to consider such ideas!
This particular comment caught my eye, amongst others:
Private equity will become king.
Whether through disposition by the government or sales by struggling financial institutions, massive amounts of distressed real estate-related positions will be sold into the private sector. Significant capital has been raised and is waiting for these opportunities…
I previously twittered one interesting deal that put this same idea in my head:
So I called McKenna Long and reached partner Mick Cochran, a specialist in private equity, mergers and acquisitions, corporate finance and distress transactions. Mick’s core practice involves representing buyers, sellers and financiers in their investing activities.
My questions were, “Where will the money come from for these transactions and do they see opportunities for assets beyond real estate?”
Mick says there is quite a bit of money on the sidelines waiting for opportunities just like this and great opportunities go beyond real estate assets. The potential buyers are large private investors that are not dependent on the same credit sources as you and I. I believe Mick was talking about high net worth individuals like Sam Zell, Ted Forstmann, Warren Buffet (to some extent) and boutiques not the funds tied to investment banks. Institutional investors that support the funds at investment banks have seen constraints due to the interconnectedness of the sophisticated financial instruments such as securities lending practices that most depend on for day to day financing and portfolio optimization. The “investment banks,” if there are any left, will not being active until things calm quite a bit more.
I asked Mick about the impact of so many firms and assets potentially ending up in private hands, outside the scrutiny of the public markets and reasonable transparency regarding financials and stewardship. After all, just because a company is private, as we have seen with the automotive companies and their suppliers, it doesn’t mean that they don’t have quite a few stakeholders who need to know whats going on.
When a firm is private, it’s a lot harder to get financial statements and find out who their auditor is. Private companies are not subject to Sarbanes-Oxley. How does one monitor independence and an arms-length approach by private boards loaded with self-interested private equity investors? Will these companies be managed with some longer term thinking for the benefit of employees, customers, the financial markets, and minority investors versus short term planning aligned solely with the majority investors’ exit strategy?
More regulation in general is expected and Mick Cochran is not alone in believing there will be significant additional regulation coming for hedge funds and private equity firms. His clients may not be happy about that, but Mick was frank about its inevitability given current market conditions. In fact, one of the hearings this week in the US Congress covers hedge fund regulation.
For another perspective, listen in on this webcast sponsored by The Corporate Counsel.Net. Looks like a good lineup.